Capital Allowances
The 2007 budget introduced changes to the way capital allowances are given. This fact sheet contains an overview of the main changes.
Plant and machinery pool
The rate of writing down allowance on the general pool is reduced to 20% from 25% from 1st April 2008 for companies and 6th April 2008 for sole traders and partnerships. At the same time first year allowances cease.
Where a business year end straddels the tax year initially a composite rate of capital allowances will be allowed.
If you are thinking of purchasing a capital asset near your year end please do not hesitate to contact us if you would like to know whether it would be more beneficial to purchase the asset before your year end, or after it.
Annual Investment Allowance (AIA)
This is a new proposal and replaces first year allowances. The annual investment allowance allows businesses to claim a 100% allowance for up to £50,000 worth of investment in most capital assets. The main exclusion is cars.
This means that for expenditure in capital assets up to the value of £50,000 for each £1 invested the taxable profits are reduced by £1.
A group of companies will only receive one lot of £50,000 allowance, however it is up to the group as to how this is apportioned between the companies.
Individual limited companies, sole traders, and partnerships will each get an allowance of £50,000. This means that if a person has a self employment, but also owns a limited company, both the self employed trade and the limited company trade will each get an allowance of £50,000.
Example A
A business has taxable profits of £25,000 and during that trading period purchases a van for £15,000. The £15,000 is given AIA and the taxable profits are reduced to £10,000.
For a sole trader business this would initially save tax at a rate of 22% and class 4 NIC of 8% giving a 30% saving. For a sole trader who is receiving family tax credits the saving would also be worth a further saving of 36% in respect of the increase in tax credit payments.
Example B
A business buys several pieces of equipment for £75,000. The first £50,000 would be treated under the AIA giving a £50,000 reduction in profit. The remaining £25,000 would be treated as general pool and normal capital allowances of 20% would be granted.
Long Life Asset Pool
Long life assets are assets that are expected to last for more than 50 years.
The rate of allowances on long life assets increases from 6% to 10%.
Fixtures in buildings
Certain fixtures within buildings currently qualify as plant and machinery and currently attract a 25% writing down allowance. From 1st April 2008 for companies and 6th April 2008 for sole traders and partnerships the rate is reduced to 10%. If you are thinking of buying/developing a building for your own use we would advise that this is done prior to these dates.
If you would like further guidance as to what qualifies as a fixture then please contact us.
Abolition of Industrial Buildings Allowance and Agricultural Buildings Allowance
These two allowances will be abolished over the period from 2008 to 2011 with the allowances being reduced as follows: -
| April | Rate of RDA |
| 2007 | 4% |
| 2008 | 3% |
| 2009 | 2% |
| 2010 | 1% |
| 2011 | 0% |
Once the IBA and ABA is abolished there will be no balancing allowances created if the buildings are sold.
Enhanced capital allowances (ECA)
Enhanced capital allowances are available for certain energy-saving or environmentally-beneficial plant and machinery. The most common of these is efficient air conditioning systems. If you acquire such an asset you will receive 100% allowance in the year it is purchased.
ECA currently remain unaffected by the changes in capital allowances.
Capital allowances and cars
For cars with a CO2 emission of no more than 120g/km 100% first year allowance can be claimed.
Currently cars costing less than £12,000 will be included in the general pool and normal writing down allowances claimed.
For cars costing over £12,000 the writing down allowance in any year is restricted to the lower of the writing down allowance, or £3000.
There are proposals to change the capital allowances available for cars to the following: -
- For cars with CO2 emissions below 120g/km a 100% first year allowance will still be available.
- For cars with a CO2 emissions between 121 and 165g/km would be included in the general pool.
- For cars with a CO2 emission over 165g/km will have a lower rate of writing down allowance. This has not been published yet, but may be only 10%.
If you are considering purchasing a new car then talk to us to find out whether the new rules have been implemented and how they will affect you.
Download the Capital Allowances fact sheet as a pdf
If you have any queries or require professional advice then please do not hesitate to contact us.
